Lenders Who Fail to Notify of Determination to Cease Funding Project May Be Liable to Contractors and Others Who Gave Notice

LENDERS WHO FAIL TO NOTIFY OF DETERMINATION TO CEASE FUNDING PROJECT MAY BE LIABLE TO CONTRACTORS AND OTHERS WHO GAVE NOTICE

By: Larry R. Leiby, Esq. and Robert S. Tanner, Esq.

About the Author: Larry Leiby, Esq. was the founder and first chairman of the Florida Bar Construction Law Committee in 1976. He is the author of the Florida Construction Law Manual. He is Board Certified in Construction Law and was on the Construction Law Certification Committee that creates and grades the tests for construction law board certification. He was awarded the lifetime achievement award by the Florida Bar Construction Law Committee and teaches construction law at the Florida International University College of Law. He can be reached at leiby@mkpalaw.com. For more information, please visit www.mkpalaw.com.

One Florida statute provides important protection to contractors where owners have refused to pay and the construction lender allowed construction to proceed without notifying contractors that it would not make further disbursements. Specifically, Florida Statutes, section 713.3471(2)(a), provides:

  • Within 5 business days after a lender makes a final determination, prior to distribution of all funds available under a construction loan, that the lender will cease further advances pursuant to the loan, the lender shall serve written notice of that decision on the contractor and any other lienor who has given the lender notice. The lender shall not be liable to the contractor based upon the decision of the lender to cease further advances if the lender gives the contractor notice of such decision in accordance with this subsection and the decision is otherwise permitted under the loan documents.

Interpretation of this statute was at issue in Whitehead v. Tyndall Federal Credit Union, 2010 WL 3583981 (1 st DCA Fla. Sept. 16, 2010). In that case, John and Susan Jones ("Owners") entered into an agreement with Victor Whitehead d/b/a Whitehead Construction ("Contractor") for the construction and sale of a new home. Owners entered into a Construction Loan Agreement with Tyndall Federal Credit Union ("Lender") for the project. Contractor acknowledged by signature the following provision in the agreement:

  • The undersigned acknowledges that he is aware of the amount of the loan and has reviewed and approved of the draw schedule. The undersigned further acknowledges that Lender and the undersigned are not in privity and that Lender owes no duty to the undersigned beyond disbursing the loan proceeds between Lender and [Owner] in the manner requested by [Owner].

Contractor proceeded with construction, ultimately receiving $165,680 in advances. Contractor and Owner had disputes and Owner told Contractor that no further draws would be disbursed. Contractor filed a claim of lien but continued working to avoid being in breach of contract. Owner fired contractor. By the time Owner fired Contractor, Contractor had accrued and additional $57,358.43 in expenses. Owner then hired a replacement contractor who finished the project. Lender disbursed the remaining loan amount to the replacement contractor. Contractor sued.

The trial court ruled against Contractor based a finding that Lender did not violate section 713.3471(2)(a) because Lender never decided to cease further loan advances prior to final distribution of all funds available under the loan. In fact, Lender disbursed the entire loan amount. Contractor appealed.

The appellate court handled the matter as one of statutory interpretation. One of the "rules" of statutory interpretation is that, "a literal interpretation of the language of a statute need not be given when to do so would lead to an unreasonable or ridiculous conclusion." The appellate court found that the trial court's interpretation of the statute was literal but that it did not support the purpose of the statute. The appellate court found the statute's purpose was "to prevent . . . the unjust termination of payments to a contractor who continues to work, without any notice from the lender that payments will be terminated."

Florida Statutes, section 713.3471 may provide recourse against the project lender. Consulting a knowledgeable construction attorney can help you determine whether the statute applies in your situation.